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About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ... (More)

About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved downtown in 2006 and enjoy being able to walk to activities. I do not drive and being downtown where I work and close to the CalTrain station and downtown amenities makes my life more independent. I have worked all my life as an economist focusing on the California economy. My work centers around two main activities. The first is helping regional planning agencies such as ABAG understand their long-term growth outlook. I do this for several regional planning agencies in northern, southern and central coast California. My other main activity is studying workforce trends and policy implications both as a professional and as a volunteer member of the NOVA (Silicon Valley) and state workforce boards. The title of the blog is Invest and Innovate and that is what I believe is the imperative for our local area, region, state and nation. That includes investing in people, in infrastructure and in making our communities great places to live and work. I served on the recent Palo Alto Infrastructure Commission. I also believe that our local and state economy benefits from being a welcoming community, which mostly we are a leader in, for people of all religions, sexual preferences and places of birth. (Hide)

Recent Tariff Proposals are Bad Policy

In January the administration announced tariff hikes on solar panels and washing machines. yesterday tariff increases were proposed for steel and aluminum.

The proposals are designed to increase domestic production and jobs in these sectors--both for existing companies and potentially inducing foreign companies to set up production facilities here.

What could be bad about this?

It is helpful for the first order impacts to think of producers and users. The producers are likely to see some gains in jobs and production, The users are likely to see increases in prices. The price increases will lead them to buy less of the product, therefore reducing demand or have less money to spend on other goods and services.

In each of these industries users outnumber producers by a very large amount. For example, in steel there are about 140,000 industry jobs and 6.5 million jobs in major industries that use steel such as autos, packaging and construction.

So lots of industries and consumers will be hurt a little and a few producers will gain production and jobs. The tariff is like a tax increase where many pay and few receive the benefit.

The second order impacts are much worse and all negative,

First, there may be retaliation in the form of higher tariffs on American goods. The two most named now are agriculture and heavy machinery. Apparently the President thinks no one will retaliate--that has not been the history of world trade

Third, trade wars are not generally considered the best policy for building collaboration to, for example, fight terrorism (how is punishing South Korea going to make it easier to deal with North Korea). deal with climate change or in general contribute to trust among allies.

California and the Bay Area are major users and small if at all producers of these products so the policies are especially bad for our state.

The debate on steel and aluminum tariffs is still open and the President often says things he does not follow through with.

So perhaps with strong support from industry and Republicans (the politics of this are interesting!!) the proposed tariff increases will not happen.

Posted by Apple,
a resident of Atherton: other,
on Mar 2, 2018 at 9:51 pm

Targeted tariffs provide industry protection against dumping. China has been known to dump goods onto to the US at below cost of production. Steel and aluminum are two of them. And these tariffs are targeted at China, as were the solar panel tariffs before them. The South Korean government subsidizes washing machine production.

US producers go bankrupt since they cannot compete with state subsidized competition. The foreign manufacturer can even sell below cost. After US manufacturers go bankrupt, China is the only manufacturer left standing with heft. In the long term, they eventually become a monopoly or oligopoly in the particular industry.

The US should protect domestic industries against unfair foreign government competitive practices.

China can retaliate, but it needs US consumers more than US producers need China. They can't stand a trade war for long. The Chinese economy is more fragile.

China's market are very closed when it comes to trade. This closed market hurts local tech companies. When a foreign company opens in China, it can expect a whole host of rules that domestic companies do not need to follow. When a US company wants to start a cloud business in China, it is forced to partner with a local Chinese cloud provider, which owns a majority of the business. The US company has to hand over its IP to the Chinese partner to run the data center.

Last I checked, Chinese companies didn't need to follow similar rules when opening up US cloud data centers.

The US certainly doesn't want a trade war, but it also wants its own companies to be treated fairly. At some point, the US needs to stand up and tell China they have gone too far. If the US doesn't, China will just push the envelope more and more.

Targeted tariffs are a bipartisan tool to protect US producers from unfair competition. Obama raised tariffs on tires in 2009 when China was dumping tires at below cost in the US.

Posted by stephen levy,
a resident of University South,
on Mar 3, 2018 at 12:08 pmstephen levy is a registered user.

@ Apple

Even if you are correct on the dumping charge, it does not change the economics. Tariffs raise prices and are in effect a tax on users. the finding that producers may gain from tariffs and the much more numerous class of users lose remains correct.

Next, the rationale offered by the administration was national security not dumping. And a further insight into the rationale comes from Trump's statement yesterday that trade wars are good. Since most of our steel use comes from domestic production and imports from friendly countries such as Canada, how can there be a national security rationale.

With regard to alleged Chinese dumping, that would require proof and if available, the U.S. could file charges with the World Trade Organization. Moreover, if China is the target, how do you explain that the tariffs apply to all countries.

And all of this is before the possibility of retaliation, for example, against agricultural exports or Boeing contracts going to Airbus or a more larger impact on domestic prices facing consumers.

Finally, if this is a pro business policy, why are Republicans, companies, the Wall Street Journal and most of his economic advisers trying to stop the tariffs?

Posted by Apple,
a resident of Atherton: other,
on Mar 3, 2018 at 1:04 pm

@Stephen

Yes, tariffs raise prices for all consumers. All taxes do. If you want to lower prices to consumers, then eliminate *all* tariffs and taxes. Goods are then much cheaper. Of course, that would rob the government of all revenue, which would make it impossible to provide services. It would also end the government's ability to use tax policy to encourage and discourage behavior, such as discourage foreign governments from dumping underpriced goods onto the market to drive US producers out of business.

Tariffs are a revenue source and policy lever. Lowering and raising them should be viewed through that lens in addition to its effect on consumers.

The official reason for the tariff is the national security angle. The real reason is stop dumping behavior. The government can't say it's dumping officially since it takes years of effort to demonstrate each individual country is dumping. By that time, US producers go out of business and the damage is done. Look at what happened to all the US-based solar producers. The US took their case to the WTO. China delayed, delayed, appealed, and appealed. The US producers all went out of business as the US pressed its case over the years with the WTO.

The WTO can't turn back time and bring those bankrupt companies back to life. That is how China games the system. That is why they appeal everything whether they have a case or not.

When there's a national security angle, the law allows implementing tariffs much more quickly.

Right now, the tariffs *could* apply to all countries. It's actually not been specified which ones yet. The national security angle makes applying targeted tariffs messier. If US law lets some countries be excluded since they are not a threat, I expect that to happen.

If China wants to retaliate, let them retaliate. At some point, the US must stand up for itself and require that China compete legally, not through dumping and not through barriers to protect its domestic producers.

I'm curious whether you believe trade with China is fair. If it's not fair, how do you propose the US stand up for its own US producers, which themselves could be foreign companies with US factories? WTO cases have not been effective.

Since you are an economist, you are aware that the US has been losing its blue collar manufacturing jobs for decades. Those jobs are going to the country that is willing to bend every rule in the book to take all the production jobs it can. If foreign country producers can underprice US produced goods through regular market means, I can accept that outcome. But if a foreign country subsidizes its producers in order to drive out US competition, this is patently illegal. The means WTO uses to stop this behavior is ineffective as we've seen China time after time break these rules, eat the short term penalties, and reap the long term benefits.

The Obama administration applied higher tariffs on Chinese tires, wind towers, thermal and coated paper, certain lawn trimmers, kitchen shelving, steel sinks and cylinders, line pipes and extrusions, you name it. China keeps up the same strategy. It's obviously not deterring the behavior.

Posted by Apple,
a resident of Atherton: other,
on Mar 3, 2018 at 1:40 pm

@Steve

I would also be curious how WTO addresses the fact Chinese companies have been stealing US IP for years, such as manufacturing processes, as well as Silicon Valley hardware and software. A common method that the Chinese use is they open up a factory in China to make an American good, then take the plans across the street and make the same product undercutting the IP owner.

What does the WTO do to enforce those rules?

I'm not aware of any. When the US companies press their case in Chinese courts, apparently the rule of law doesn't apply when they are the plaintiff.

The Chinese limit the US goods that can enter into their country or put high tariffs on them. They steal our IP and sell it back to us after the US company spent all that money on R&D. They subsidize their own companies to drive foreign competition out of business.

There's already a trade war with China. They break all the rules and put up all the barriers. We play by the rules. Our consumers benefit, but our producers lose their jobs because China took them through illegal means.

Being from Silicon Valley, we lose sight of the real angst blue collar America feels that they play by the rules and get taken advantage of. The elites tell them we're pressing the case with the WTO, but they see those WTO rulings don't do anything to stop China.

Posted by Harry Merkin,
a resident of Ventura,
on Mar 4, 2018 at 6:20 pm

"Chinese companies have been stealing US IP for years, such as manufacturing processes, as well as Silicon Valley hardware and software. A common method that the Chinese use is they open up a factory in China to make an American good ... "

Yup. The American companies knew this all along, but they eagerly went along with it. Want to know why? Cheap labor, and competition from other American companies eagerly exposing their IP goodies for cheap labor. With cheap labor you can sell your products cheaper than your competitors that aren't using cheap labor. If you get undersold by competitors using cheap labor that you aren't using, you go out of business. It's Competition, that great virtue we worship as capitalists. So learn to like it or become a socialist.

"... the US has been losing its blue collar manufacturing jobs for decades. Those jobs are going to the country that is willing to bend every rule in the book to take all the production jobs it can."

Those jobs don't just wander away on their own, like errant children. Our elites, whose only patriotism is to money--ever more money--willingly take them away to the country that is willing to bend every rule in the book, in order to make more money for themselves and their elite investors. If you're unhappy about that, direct your ire at Trump and his elite swamp pals who continue to export American jobs.

Posted by stephen levy,
a resident of University South,
on Mar 4, 2018 at 7:35 pmstephen levy is a registered user.

It is easy to blame China as it is easy to blame Muslims or Mexicans but these attacks distract from getting to good policy.

Some facts

Large numbers of blue collar jobs were lost in the 70s and 80s (think Cleveland and Pittsburgh) before China was an economic power. Many construction jobs were lose when we stopped building enough housing *hard to blame foreign trade).

So blue collar job losses are real but most were the result of productivity/automation.

We import 8 million cars, about 50,000 from China.

About 200,000 jobs are related to steel and aluminum production, 6.5 million for direct users of these products.

The Commerce Department estimates that national security uses are about 3% of domestic steel production, imports not needed.

This is the first time i remember that Bloomberg News and the Wall Street Journal both think the recent tariff proposals are bad for the economy.

Restoring middle wage blue collar job growth is a hard task but one clear solution will work. Build lots of stuff--homes, building energy retrofits, repair roads and bridges and dams.

And if in doing so we import some products that are cheaper or better then we can produce here, reducing costs benefits lots of people.

Posted by Anon,
a resident of Another Palo Alto neighborhood,
on Mar 4, 2018 at 9:06 pm

Sure, these proposals are bad. (I'm not sure that there is a "policy" as the word used to be understood.)

But, the emotional appeals for coal, for manufacturing jobs, for steel, and so on, do not need to be part of a coherent policy. They are a political appeal to blue collar voters. Inequality has been rising since 1982**, and, many blue collar voters attribute that to increasing trade with poorer countries. Economists may look at the causes of inequality differently. But, economists can't deny the rising inequality in wealthier countries, and, right-wing populist political figures in many countries are now attributing it to increasing global trade. A global trade war may indeed be coming.

I love reading the opinions of "economists", journalists and columnists. These are people who profit from writing articles, doing "studies", and touting statistics. But are they really creating anything?

The fundamental concept here is that productivity isn't rewarded in our system. Instead, we have an overly regulated system which benefits lawyers and encourages lawsuit abuse. We play the race card way too often as a way of moral licensing even as we benefit from sweatshops and cheap labor. The virtue signaling continues in Stephen's post above, an example of how we perpetuate this unhealthy, unbalanced economic system.

Look beyond the statistics and realize how much we need to value productivity in our country more than we should value punditry and academic "expertise".

Posted by Anon,
a resident of Another Palo Alto neighborhood,
on Mar 5, 2018 at 9:59 am

Posted by Resident, a resident of Midtown,

>> I love reading the opinions of "economists", journalists and columnists. These are people who profit from writing articles, doing "studies", and touting statistics. But are they really creating anything?

If they are actually creating an understanding of how economies work, then, yes, they are creating something of value. But, you have to be careful to understand what they saying and what they aren't. For example, in 1981, when the ERTA of 1981 was passed, there were predictions - correct - of "growth" in the future. What was also predicted, by critics, was growth of the national debt and growth of inequality. And, that is exactly what happened.

>> The fundamental concept here is that productivity isn't rewarded in our system. Instead, we have an overly regulated system which benefits lawyers and encourages lawsuit abuse. We play the race card way too often as a way of moral licensing even as we benefit from sweatshops and cheap labor. The virtue signaling continues in Stephen's post above, an example of how we perpetuate this unhealthy, unbalanced economic system.

These are Fox News buzzwords. The reality is that we continue to cut taxes for the rich, and, the rich get richer, while people of below-average incomes are not sharing the wealth. And now, it is getting worse, because there is decreasing demand for unskilled/semi-skilled labor.

>> Look beyond the statistics and realize how much we need to value productivity in our country more than we should value punditry and academic "expertise".

When all work is done by robots, only "capital" will be productive, and "labor" will have no value. What happens then?

Posted by Anon,
a resident of Another Palo Alto neighborhood,
on Mar 8, 2018 at 8:44 am

I disagree with the rosy view of "large job gains". Sure, those who are highly educated, those who have specific skills, are doing pretty well right now. But, there has been a long-term downward trend in the availability of blue-collar jobs. I can't post graphs here, but, look at the graphs in this article:

It is obvious that there is a significant problem with (dropping) labor-force participation among non-college-educated young men. Historically, the loss manufacturing and construction jobs has resulted in reduced participation in the labor force. And now, we are automating more of the jobs that are left, such as jobs for -drivers-, such as taxi drivers. Maybe it isn't an "economic" problem, but, it is a political problem. Economists, such as yourself, need to focus really hard on economically valuable work for young men who are not college graduates.

Will steel tariffs, the original subject, help? Not really, but, that isn't the point. It wouldn't be a political issue if blue-collar jobs and wages had kept up over the last 40 years.

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